How Timothy Geithner survived.
In January, Timothy Geithner, the treasury secretary, received an invitation to testify before the House government oversight committee. It was a moment the administration had been dreading for months. Now that the GOP controls the House of Representatives, it has enormous investigative power, which flows through the oversight committee and its ambitious chairman, Darrell Issa. And, in the run-up to the November election, Issa hadn’t been shy about his intention to use it. Such was the anxiety on Pennsylvania Avenue that the White House had quietly assembled a team of lawyers and communications staffers to deal with Issa’s requests.
Geithner was inclined to reject the invitation, a move fraught with risk. Had he simply shown up and testified, the moment would likely have passed with little fanfare. By declining, he would give Issa a chance to compel his appearance through a subpoena, an escalation sure to attract half the TV crews in greater Washington. Oh, and the date for the hearing would be January 26, the morning after the State of the Union address. Nevertheless, when Geithner ran his decision by the White House, the president’s political aides offered their blessing: Fine, they said, let’s escalate.
Back in 2009, courting a Geithner-Issa faceoff would have been the surest way to knot David Axelrod’s stomach, with the possible exception of a Joe Biden reality show. With his sleek build and trademark spread collar, the fresh-faced Geithner looks like nothing so much as Main Street’s idea of a Goldman Sachs partner.
Even before he officially started work, Geithner had acquired a reputation as the administration’s most controversy-prone member. In his former job as president of the New York Fed, he’d stirred populist angst with the bailouts he helped engineer. Then, not long after President Obama tapped him for Treasury, news leaked that he’d failed to pay payroll taxes on income from the two-plus years he worked at the International Monetary Fund (IMF)—a common oversight for American employees of international organizations. Republicans pilloried him as a tax cheat and overwhelmingly opposed his nomination in the Senate.
Geithner’s fortunes only worsened after he was confirmed. On February 9, 2009, the president announced that his treasury secretary would present a detailed plan for solving the financial crisis the following day. The problem was that there was no detailed plan. When Geithner delivered a vague and unimpressive speech, the stock market shed nearly 400 points, sending investors and West Wing denizens into a panic. White House Chief of Staff Rahm Emanuel accepted part of the blame for setting the treasury secretary up to fail, but, privately, he was alarmed. “Rahm’s thing is, can he put [a Cabinet secretary] on a Sunday show and not have to clean it up on Monday? That was his test,” recalls a former White House aide. “Early on, Tim was not doing well.”
And yet, at the midway point of Barack Obama’s first term, Geithner is the lone remaining member of the president’s original economic team and arguably the administration’s second-most valued official. Indeed, that the White House was willing to let him face down Issa is only the latest sign of a rather remarkable transformation. (Issa ultimately blinked.) Geithner owns the economic portfolio with China and has been tasked with confronting Republicans over the nation’s debt limit. He has taken the lead on corporate tax reform and overhauling Fannie Mae and Freddie Mac. With his former lieutenant, Gene Sperling, now running the National Economic Council, Geithner will no longer form part of the multiheaded “war cabinet” that included Sperling’s predecessor, Larry Summers. He is set to play the first-among-equals role of a traditional treasury secretary.
One possible cause of this turnaround is the success of some of his policies. Wall Street looks like a patient that staggered off its death bed and promptly took up ultra-marathoning. The fiscal cost of the bailouts, once expected to be in the hundreds of billions, has drifted asymptotically toward zero. Financial reform sits snugly in the Federal Register. But there’s another, less understood explanation, which is that Geithner was never the bumbling bureaucrat he first appeared to be.
For all the turmoil he’d kicked up in the outside world, the striking thing about Geithner’s early days in Washington was how popular he was within Obamaland itself. “From the inside, it didn’t feel like he ever lost his footing,” says one transition staffer. With the cable dial still squawking over his tax mishaps, a group of incoming White House aides unofficially voted him “best all-around Cabinet member,” high school yearbook-style. Daily White House staff meetings featured a joking banter between Geithner and Axelrod over such topics as his apocryphal tour at Goldman and the approximate date of his future firing. (Sample Geithner response: “I hope they do it soon.”)
As it happens, this was hardly Geithner’s first experience adapting to a foreign environment. When he was six years old, Geithner’s father, Peter, moved the family to India, where he helped oversee the Ford Foundation’s development programs. The five years the Geithners spent in Delhi differed from the typical expatriate experience in subtle but important ways. Unlike the families of Foreign Service officers or CIA personnel, the Geithners lived among Indians, albeit in an affluent district called Friends Colony. “People who were there ... for a shorter period of time—maybe living in the embassy—tended to react to the complexities of India differently,” recalls Peter Geithner. Some of his children’s classmates were intent on becoming “more Indian than the Indians.” Others walled themselves off as much as possible from the daily life of the country. “Our kids saw all its virtues and vices in a more balanced way,” Peter told me.
One American with a similarly nuanced view of Indian society was a Protestant minister named Ernie Campbell. Campbell was a second-generation missionary whose home was the social hub of American youth in Delhi. For families who were new in town, Campbell would hold a kind of orientation seminar, which the Geithners attended. “He had a wonderful way of emphasizing differences,” says Peter Geithner. The typical American was aghast to see Indians empty their nose by holding one finger to their nostril and blowing. Campbell would say, “Think of how strange it is to the Indians to see Americans wrap their bodily waste neatly into a white handkerchief and stuff it back into their pocket.” “Growing up overseas,” Tim Geithner told me, “you learn to look at life from the perspective of other people.”
Geithner spent his high school years in Thailand, where his father held another senior position with the Ford Foundation. In 1988, after graduate school and a brief stint at Kissinger Associates, he joined Treasury as a junior trade official. Two years later, he was back in Asia—this time in Tokyo as a treasury attaché. Despite having little experience as a diplomat, Geithner quickly impressed his superiors—so much so that the ambassador, Michael Armacost, tried to sell him on a Foreign Service career.
Armacost recalled that Geithner played a key role in persuading the Japanese to increase their financial contribution to the first Gulf war, part of a U.S. government effort dubbed “Operation Tin Cup.” What Geithner quickly recognized, Armacost says, is that success meant appealing to the middle ranks of Japan’s Ministry of Finance, and he cultivated them assiduously. “It’s important in their bureaucracy, where the minister can’t make decisions of that magnitude without support down underneath,” Armacost says. “Policy bubbles up rather than trickles down.”
In 1993, Geithner caught the attention of another prominent patron—Larry Summers—whom Bill Clinton had appointed as his treasury undersecretary. Summers took a personal interest in Geithner’s career and promoted him each time he rose through the Treasury ranks. When the Clinton administration ended, Geithner briefly considered joining a financial firm but was underwhelmed by the opportunities in the field. He eventually accepted a job as the head of policy development for the IMF, essentially the organization’s third-ranking position.
As assimilation challenges go, it may have been his toughest assignment yet. The IMF is a notoriously insular place. Staffers tend to join in their late twenties or early thirties, shortly after graduate school, and spend their careers inching up the hierarchy. Outsiders, particularly those without Ph.D.s, are regarded with some combination of suspicion and disdain.
According to former co-workers, Geithner was deft at bringing skeptical colleagues on board. One technique involved homing in on possible dissidents and absorbing their suggestions into his proposals. When the Fund’s powerful treasurer, Ed Brau, wavered on Geithner’s plan to make extra money available to countries facing especially dire circumstances, Geithner proposed, à la Brau, requiring that the Fund first check the impact on its own cash reserves. He called it the “Brau check.”
“Tim’s real strength ... is that he’s really quick at reading the culture of any institutions,” says Leslie Lipschitz, a former Geithner deputy. The first time the two men met was at a seminar not long before Geithner joined the IMF. “I was pushing my ideas hard—I always think I’m the wisest guy in the room. Tim’s turn came to speak, and he said he very much agreed with the views of Leslie Lipschitz. He described the ‘Lipschitz thesis.’ ... It struck me—wow. This guy’s coming to the Fund.”
After signing on as treasury secretary, Geithner proved just as skilled at discerning the rhythms of the White House. He played basketball—the reigning sport of Team Obama—with Dan Pfeiffer, a young strategist who was then being groomed to be communications director. He made a point of getting to know Pfeiffer’s wife, Sarah Feinberg, a top aide to Emanuel. “If you’re used to a corporate setting, and you walk into the West Wing and see people sitting outside an office, they look like secretaries. You don’t understand that person is making a lot of stuff happen,” says one treasury aide. “Sarah is someone Tim talked to quite a bit.”
Perhaps most important, Geithner was scrupulously attuned to the temperament of the boss. Like Obama, he evinced a strong aversion to blather. During meetings with the president, he would say little, and usually not until the end, when his opinion was solicited. “I thought [Geithner] got the president really well,” says a former administration official who interacted with him on nonfinancial matters. “When he was in trouble, I said to someone, ‘He just needs to hold on. He’ll be fine with Obama. Once they get to know each other, they’re like the same person.’”
The first meaningful test of Geithner’s backroom bona fides came during the debate that gripped the new administration in late 2008 and early 2009: How should the government respond to the deepening bank crisis? In addition to being a question of cosmic importance, it also pitted Geithner against Summers, making it perhaps the first financial-policy dispute in history to be suffused with soap-operatic significance. “It was unclear who is going to be the primary spokesman on the economy,” says a former Geithner aide. “Is this the moment where the mentee becomes the [master]?”
Finding a solution to the crisis hinged on determining whether or not the banks were fundamentally insolvent. If, by way of example, a bank has $100 billion in assets (things like mortgages and mortgage securities) and $80 billion in liabilities (basically money borrowed from bond-holders and depositors), it has $20 billion in capital (100 minus 80), which shields creditors from losses. Insolvency occurs when the value of the assets falls below $80 billion, which wipes out the capital, squeezes creditors, and means the bank is living on borrowed time.
Summers worried that the financial crisis had put some of the country’s biggest banks in this position. This could require the government to inject them full of cash and take ownership in return—that is, some form of nationalization. Geithner believed that, while the banks were clearly short of capital, the financial panic had only temporarily depressed the value of their securities, which would recover when the panic abated.
If Geithner was right, the capital shortfall was much more manageable than Summers feared. The banks might be able to fill it with minimal government help, simply by selling shares to investors. But, if he was wrong, the banks would stumble along in a kind of vampire state, sucking credit from the economy and exacerbating the recession. In the worst case, fears of insolvency could trigger a modern-day version of Depression-era bank runs.
At the broadest level, the Geithner plan was about providing a clear picture of the banks’ health. He did this by subjecting them to hypotheticals that conjured an even bleaker view of the economy—the so-called stress tests—while promising government support for those that might not survive. He and his chief of financial triage, Lee Sachs, also used government money to entice investors to trade the securities whose value had plummeted. In retrospect, the stress tests restored confidence because reality at least resembled Geithner’s diagnosis. But, of course, this was far from obvious at the time, and Summers pressed his point doggedly. Several months later, at the going-away party for an aide who shuttled between the two men, Geithner spun out an elaborate metaphor that likened himself to Israel, the aide to Henry Kissinger, and Summers to—Hezbollah.
Still, at least dealing with Summers was a familiar challenge. Geithner had been sparring with his former mentor for the better part of two decades. He’d often joke that, if you wanted to get Summers to embrace an idea, you had to adopt its opposite, which Summers would then shoot down. For weeks, Geithner dispatched Sachs to Summers’s office to absorb his rhetorical blows and ensure that he’d been heard. (In fairness, it was badgering by Summers and White House economist Christy Romer that helped make the stress tests so rigorous.)
More difficult in some respects was reassuring the White House aides who didn’t have Ph.D.s in economics. Though the plan was simple in theory, the practical details were mind-numbing. Emanuel would joke that the various components—PPIP, TARP, TALF—sounded like names of hobbits. Geithner’s plan also seemed to fall short from the standpoint of political legitimacy: As messy as government ownership might have been, it would have given the taxpayers a big share of the banks’ recovery. “The real question is why the Obama administration keeps coming up with proposals that sound like possible alternatives to nationalization, but turn out to involve huge handouts to bank stockholders,” Paul Krugman complained in his New York Times column.
What finally clinched the deal was the apparent lack of a superior option—particularly once it became clear Congress was in no mood to part with more cash. At key moments in the internal debate, Geithner turned the opposing arguments around. “Okay, what’s your proposal?” he’d say. “How would that work? Would that make any sense? Why is that better?” It dawned on observers that, however valid Summers’s reservations, he had little confidence in any alternative. “[Geithner] understood the constraints we were under. Nationalization was a deeply flawed option, not least because we didn’t have the money to do it,” a senior White House official told me.
In January, I interviewed Geithner in his office at Treasury. Reporters often describe him as “boyish-looking,” but, in private settings, it’s more his manner than his appearance that evokes youth. He sometimes lapses into a vaguely teenage locution, frosting his comments with adverb phrases like “totally cool.” He is quick with a self-deprecating joke and giggles infectiously. I’d heard that, in his first meeting with Obama in 2008, he’d presented a detailed case against his own selection as treasury secretary. “I thought I had excellent reasons,” Geithner deadpanned. Then he laughed and tilted his armchair so far off the ground I worried he might topple over.
Friends and colleagues had told me Geithner had a literary streak—one recalled seeing him reading Cormac McCarthy’s All the Pretty Horses on a plane-ride to Japan in the early ’90s. I wanted to discuss what I’d heard was his favorite recent novel, Wolf Hall, the fictionalized account of Henry VIII’s powerful courtier Thomas Cromwell. I asked if he related to Cromwell, an untitled lawyer who’d ascended to Henry’s inner circle on the strength of his wits.
“I don’t see myself in that way. I thought he was a cool character, a really interesting story,” Geithner said. Then he riffed on his favorite moment in the book. The passage depicts one of Cromwell’s earliest conversations with the king-essentially his audition. “You said in the Parliament, some six years ago, that I could not afford a war,” the king submits. Cromwell deliberates for a split second, then decides to take the bait. “No ruler in the history of the world has ever been able to afford a war. They’re not affordable things. No prince ever says, ‘This is my budget, so this is the kind of war I can have.’” “It’s an awesome line about the fundamental responsibility of governing,” Geithner told me. “It’s fundamentally about making people understand that there are limits.”
In the end, Geithner triumphed internally because he made the White House understand that there were limits to what the government could do in its attempts to fix the banks. But convincing the West Wing was just the beginning.
By the summer of 2009, the banks were clearly recovering, paying back tens of billions in bailout money and replacing it with private capital. It should have been the ultimate vindication for Geithner. But he’d begun to suspect he was trapped in a dilemma for which experience hadn’t prepared him. For all of Geithner’s insider skill and off-the-charts social intelligence, he seemed almost completely aloof to the less-considered judgments of the popular mood. His career had been guided by the technocrat’s determination to treat public opinion like some other-worldly phenomenon—a meteor with only a theoretical chance of impacting the Earth. The alternative, as he saw it, was either paralysis or incoherence when making policy.
This tendency had landed Geithner in trouble during his early days as treasury secretary. He’d insisted on honoring $165 million in bonuses for AIG employees because he believed canceling their contracts was a move befitting a banana republic. He’d resisted the ouster of Citigroup CEO Vikram Pandit, despite prodding from the president’s political advisers, because he worried about finding a suitable replacement. “Tim was taking a lot of heat to make a big symbolic gesture,” says a former Geithner aide. “But he had deeply internalized that any finance minister in a crisis has to resist exactly that kind of pressure.”
Such was Geithner’s disregard for his public standing that, when he showed up in Washington during the transition, he’d never used a teleprompter or done a single TV interview, much less invested in the media training that’s a requisite for Beltway figure-dom. He’d barely practiced in the run-up to his first major speech.
As treasury secretary, this refusal to think of himself as a public figure was proving extremely damaging. The seriousness of the problem hit home in a meeting later in 2009, in which senior political aides like Robert Gibbs, Obama’s press secretary, suggested that the “Geithner plan” had entailed gifting banks to the tune of hundreds of billions of dollars. “We didn’t give the banks any money,” Geithner objected, alarmed that top White House officials had succumbed to a widespread misperception. “We forced them to go raise it.” (One can argue that some bank shareholders benefited from a kind of implicit government guarantee, though shareholders in the weakest banks did suffer significant losses under the Treasury approach.)
Geithner had always believed that sound policy would sooner or later justify itself—that it was ultimately better politics to risk a backlash with unemployment at 10 percent than to feed the backlash and watch the economy shrink further. The problem now was that public opinion and public policy were becoming inextricably linked—and not in a good way. With unemployment so high, the banks’ miraculous recoveries weren’t being hailed as a victory; they were prima facie evidence that the administration had favored Wall Street over the average voter.
Geithner now realized it wasn’t enough to get the big calls right and let the politics take care of itself. To really play at this level, he would need, if not an outside game, then at least an inside game that took account of how the public perceived his actions. “You can roll over the political folks at the White House on any issue, especially if he’s got a line to the president,” one Geithner aide told me. “But you’ve got to take their arguments seriously, their perspective seriously. They’re a proxy for how people out there”—the voters—“will hear it.”
If the crisis-response had made Geithner look like the nation’s chief bank booster, perhaps an even bigger problem was the state of financial reform. In principle, Wall Street reform was a can’t-lose proposition—a chance to show there were real consequences for the banks at the center of the crisis, and that the government wouldn’t let it happen again. But in practice, it, too, was becoming a political liability. “TARP [the bailout] put us in this position where it looked like we’re defending the banks,” says one treasury official. “Then reg reform was seen as not sufficiently robust. That persisted for a long time.”
In mid-2009, the president had gathered his economic team for a briefing on Geithner’s reform plan. In attendance was Paul Volcker, the legendary former Fed chairman, who was by then Obama’s top outside economic adviser. In the debate over the banks, the 83-year-old Volcker loomed as a rumpled, six-foot-seven-inch paragon of financial virtue. His support seemed like it could be essential to persuading the country of reform’s credibility.
Volcker told the president he approved of Geithner’s plan but also wanted to stop government-backed banks from making risky bets for their own bottom line—in effect, from acting like taxpayer-subsidized hedge funds. Geithner initially resisted, believing that such “proprietary trading” had little to do with the crisis. But, by the fall, Volcker’s idea had caught on among reform hawks and the president was intrigued. Geithner asked his wonks to consider how it might work. When he was satisfied it could be done without too much indigestion, he came back to Obama. He said he still didn’t believe the provision was substantively necessary, but that he was open to including it to bring Volcker on board and defuse concerns that the bill wasn’t tough enough.
According to people familiar with the decision, Summers was upset, believing it impossible to draw a line between the banks’ proprietary trading and trades that benefited clients, which would render the proposal unenforceable. But the rest of the West Wing cheered. “Rather than close the door and allow the conversation to devolve into tremendous complexity,” says a White House aide, “there was a willingness to say, ‘Let’s see if we can get to a place where there’s agreement.’” Two days before the breakthrough deal on financial reform last June, Geithner met with Senator Blanche Lincoln, a key holdout. He helped win her over by predicting that people would take note of two key provisions: “the Lincoln Rule”—after a provision she’d authored—and “the Volcker Rule.”
Geithner had clearly become more supple at aligning his agenda with the political zeitgeist, rather than colliding with it kamikaze-style. Perhaps most visibly, he threw himself into fighting George W. Bush’s upper-income tax cuts with a series of speeches and media appearances last summer—this, at a time when the White House was resigned to deferring the debate until after the election. “We thought there was no downside,” says the treasury official. “The worst thing that happens is that we get sold down the river, but at least we were on the right side of the fight.” Though Geithner considered it insane to spend $700 billion over ten years on tax cuts that barely stimulate the economy, it was hardly lost on him that voters also considered the upperincome cuts a low priority.
Suddenly, the man who’d never appeared on television before late 2008 was popping up everywhere from “Good Morning America” to the Fox Business Network championing the plight of the average Joe. “We’re proposing to extend tax cuts that go to more than ninety-five percent of working Americans, more than ninety-five percent of small businesses across the country,” he told George Stephanopoulos.
When the lame-duck session arrived, Democrats had little appetite for risking the expiration of all the Bush tax cuts—working-class, middle-class, and upper-income—on January 1. This deprived them of leverage, and before long Republicans insisted that any deal must include not just a temporary extension of the upper-income cuts, but also a bare-bones estate tax, a measure anathema to liberals. In exchange, they offered to extend unemployment benefits and the least progressive tax credits that had passed under the stimulus.
Geithner believed the administration wasn’t getting enough in return. He’d long argued that Democrats would need all of the expiring tax credits to agree to a deal—some $157 billion over two years.
In the end, the administration held firm and got the full package. Liberals still fulminated, but, without the extra concessions to lower- and middle-income Americans, the frustration would likely have boiled over into outright rebellion. More importantly, the deal would boost the economy while helping those hit hardest by the recession. “Tim played a key role in getting us the low-income tax credits,” says one White House official. “When they were insisting on the [estate tax cut], Tim took the position: ‘We have to get all our priorities.’ It was a very powerful statement.”
On the day of the State of the Union address in late January, I visited Geithner at Treasury to continue our conversation. He seemed in good spirits—like a man who could finally relax after a two-year hazing ritual. Before leaving to run for mayor of Chicago, Emanuel had taken to uttering the phrase “better than Rubin” in connection with Geithner’s name. He still calls in regularly. John Podesta, the former Clinton chief of staff who now runs the influential Center for American Progress, told me he’d been most impressed by Geithner’s strategic chops. “They [Treasury] were thinking, war-gaming, planning the whole debt-limit fight longer than anyone,” he said.
From time to time, the subject of politics came up. I mentioned a speech Geithner had made as class president during his senior year of high school. “That was my last experience as a politician,” he quipped. “I was a terrible speaker then and still am. I hated that part of my job.” Later, he alluded to the major initiatives of the next two years—tax reform, deficit-reduction—and said that “a huge part of the economic challenge the president faces on this stuff is that it’s going to be at the center of the political debate,” by which I took him to mean they weren’t just technocratic questions but questions of values and ideology. “You could argue—and I’ve made this argument in the past—you want somebody in this job who can bridge the political world in a different way than I can.”
Though Geithner had begun the transition from wartime to peacetime secretary successfully, I also wondered how well he would complete it. It had occurred to me that the same qualities that made him so effective in a crisis—his ability to craft solutions under enormous constraints—were less well suited to some of the tasks that followed, when a treasury secretary might have to reimagine the world rather than accept its limits as given. I asked Geithner if he had a grand vision for the postcrisis landscape—for, say, a less bloated financial sector with a smaller role in the economy—and a map for how to get there. Could he be a figure like George Marshall, who helped win the World War and then remade Europe so that it couldn’t happen again?
Geithner hunched his shoulders, pressed his knees together, and lifted his heels up off the ground—an almost childlike expression of glee. “We’re going, like, existential,” he said. He told me he subscribes to the view that the world is on the cusp of a major “financial deepening”: As developing economies in the most populous countries mature, they will demand more and increasingly sophisticated financial services, the same way they demand cars for their growing middle classes and information technology for their corporations. If that’s true, then we should want U.S. banks positioned to compete abroad.
“I don’t have any enthusiasm for ... trying to shrink the relative importance of the financial system in our economy as a test of reform, because we have to think about the fact that we operate in the broader world,” he said. “It’s the same thing for Microsoft or anything else. We want U.S. firms to benefit from that.” He continued: “Now financial firms are different because of the risk, but you can contain that through regulation.” This was the purpose of the recent financial reform, he said. In effect, Geithner was arguing that we should be as comfortable linking the fate of our economy to Wall Street as to automakers or Silicon Valley.
One can disagree with this substantively. Financial reform is a good start, with its stricter rules and new authority for regulators. But whether Wall Street can be made to behave like a normal industry rather than a source of economy-wide instability remains very much open to debate.
Still, the bigger question may be political. Is this a moment when the country demands a wholesale reimagination? A bet on Geithner going forward is a bet that the financial sector can regain its democratic legitimacy without being shrunk or radically restructured. Perhaps as much as the successes of the past two years, Geithner’s legacy will ultimately depend on how well Wall Street meets that test.